Navigating choppier waters
12 December 2017
After 2017’s stellar performance, how will Emerging Markets (EM) fare in 2018? We remain positive on the cyclical outlook as EM economies are supported by strong external demand from the G3 economies and improving domestic demand. However, this will only be part of the EM story in 2018. While 2017 was characterised by strong demand out of China, rising commodity prices, and broadly improving global trade, EM specifics will play a larger role in 2018. Similarly, unlike 2017, the EM political calendar is heavy (see Table 1) adding a higher level of uncertainty over the policy and growth outlook.
Starting with India and China – we are in line with the consensus for 2018 Indian growth at 7.0%, but slightly below consensus on China expecting 6.2% growth in 2018. After the twin disruptions in India of demonetization and the sales tax, growth is set to improve in 2018. Consumption should remain strong and may even improve on pent-up demand following the disruptions, fiscal spending could get a boost ahead of the 2019 general elections and investment will improve marginally. That said, we remain cautious due to still-low capacity utilisation levels and uncertainty around a rebound in private investment. Additionally, we still have questions around India’s data in that there are very few underlying indicators that corroborate official growth rates. Among electricity consumption, PMIs, industrial production, imports, or corporate revenues, there are very few data points that point to growth running as high as the official rates (see Chart 11). Nonetheless, we believe the Indian economy is moving in the right direction and that the recently implemented reforms and bank recapitalisation announcement will eventually pay off. In China, we are forecasting 6.2% growth in 2018, slightly below consensus. Our below consensus forecast assumes policy efforts to tighten local government financing, curb consumer loans, and enhance financial regulatory tightening will cause growth to decelerate. However, these can be partially offset by stable external demand, a healthier housing backdrop after destocking efforts, and capital controls that will limit outflows amidst Fed tightening. That said, imbalances have continued to grow and there are significant risks to our somewhat benign (albeit below consensus) view.
In Russia and Brazil, we are slightly below consensus. In Russia we are forecasting 1.7% growth, marking a slight deceleration from this year as Russian growth falls back towards potential. Household consumption should remain robust, but investment growth is likely to be lower next year – corporate profits will likely weaken and destocking will largely be absent. Fiscal spending is also likely to be tighter for 2018, though some pick-up is expected ahead of elections in March. Long-standing structural weaknesses, including rigidities in the labour market, are likely to restrict potential growth in the medium-term. In Brazil, we are expecting growth near 2.2%, slightly below consensus. Household consumption is clearly recovering due to lower interest rates and labour market stabilisation, but we expect a slow recovery in business investment due to low levels of capacity utilisation and high levels of political uncertainty leading up to the presidential election in October. Furthermore, fiscal imbalances remain a serious risk, as public debt is unlikely to stabilise in the absence of structural reforms.